I would like to wish you a happy, healthy
new year. This post will provide you with a brief update on financial markets
and my thoughts on what may lie ahead.
The global economy in aggregate continued
to strengthen in 2014, although the improvement, as has been the case through
most of the current recovery, was uneven. After shrinking in the first quarter,
the U.S. economy grew at a much stronger rate than expected in the second half
of the year. While not as robust, Canada’s economy also registered encouraging signs
of improvement during 2014. In other regions, geopolitical events such as conflict
in Ukraine and the Middle East, slower growth in China and the risk of
deflation in Europe affected financial markets. Overall, the global expansion moved
cautiously forward.
Global financial markets also started the
year on a hesitant note, but benefited from improving economic trends and
strong corporate profits through the spring and summer months. Most equity
indexes were positive through the end of the third quarter, but volatile
conditions surfaced in the fourth quarter as investors began to focus on the
slowing pace of growth in emerging markets, particularly China. Concerns about oversupply
in the energy market caused a sharp drop in the price of oil and other
commodities, which was felt broadly across many markets and sectors. The price
per barrel of crude dropped to less than US$50 at the start of 2015, the lowest
since 2009.
Canada’s commodity-heavy S&P/TSX Composite
Index was particularly volatile in the fourth quarter, staging a series of sharp
declines and rebounds. The Canadian index finished the three-month period with
a loss of 1.5%, but registered a respectable gain of 10.6% for the year. The
falling price of oil, which is a major Canadian export product, also caused the
Canadian dollar to lose value relative to the U.S. dollar. The loonie finished
the year about 8% lower at 86.2 cents U.S.
The MSCI World Index, which measures large
and mid-cap equities across 23 developed markets, gained 5.5% for the year in U.S.
dollar terms. Accounting for the Canadian dollar’s decline, however, this gain
was magnified to 15.1% for Canadian investors. The performance of the World Index
reflected generally weaker results in emerging and developed markets outside
North America and the robust gains for U.S. equities. The benchmark S&P 500
Index benefited from strong U.S. economic trends, growing consumer and business
confidence and healthy corporate profits, adding 13.7% in 2014. Again, Canadian
investors in U.S. stocks benefited from the decline in the value of our own currency,
with the U.S. market up 24% in Canadian dollar terms.
Turning to fixed-income markets, the
moderate pace of global economic activity in 2014 meant that monetary policy
remained highly accommodative to growth. Although the U.S. Federal Reserve
officially ended the asset purchase programs it had used to stimulate the
economy since 2009, central banks in Europe, China and Japan took steps to keep
interest rates low, their currencies weak and their export markets competitive.
Bonds performed well in this environment. The FTSE TMX Canada Universe Bond
Index, a measure of Canadian government and investment-grade corporate bonds,
added 2.7% in the fourth quarter for a gain of nearly 8.8% for the year.
As we head into 2015, the global economy
continues to slowly expand. Although interest rates remain low, there are some
indications that rates, at least in North America, could begin to move higher
in the coming year, which could be a headwind for fixed-income investments. Nearly
six years after the financial crisis, equities have delivered generally
positive results, but markets are cyclical, and it is always difficult to
predict their direction in any given year. While the sharp drop in oil prices has
weighed on the Canadian equity market in particular, it is important to
remember that asset classes, industry sectors and geographic markets often move
in divergent directions. Lower oil prices, for example, can be positive for
other sectors as they strengthen consumer confidence and reduce costs for
manufacturers, transportation companies and related industries.
In my view, recent market events support
the case for maintaining a portfolio that is well diversified across asset
classes, geographies and industry sectors. Diversification will help to
maximize returns for your portfolio, while mitigating risks as they occur,
including currency and interest rate movements.
I hope you find this overview helpful. We
work hard to develop the portfolio that best reflects your long-term financial
goals and tolerance for risk. Should you have questions about your investments
or any other issue, please feel free to give me a call. I wish you all the best
in 2015.
The
information in this post is derived from various sources, including CI
Investments, Signature Global Asset Management, Cambridge Global Asset
Management, Globe and Mail, National Post, Bloomberg, Yahoo Canada Finance, and
Trading Economics. Index information was provided by TD Newcrest and PC Bond,
and all quoted equity index returns are on a total return basis (including
dividends). This material is provided for general information and is subject to
change without notice. Every effort has been made to compile this material from
reliable sources; however, no warranty can be made as to its accuracy or
completeness. Before acting on any of the above, please contact
me for individual financial advice based on your personal circumstances.
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